BOSTON - There are three basic ways to save the Social Security. We can cut benefits, raise revenue or do a combination of the two.
The bipartisan National Commission on Fiscal Responsibility and Reform, as part of a proposal to slash $3.8 trillion from the federal budget deficit, is taking the combo-and-then-some approach.
In its draft plan to rescue Social Security and prevent what some see as inevitable in the absence of action - a sudden 22 percent reduction in benefits for all beneficiaries in 2037 - the deficit commission wants to tax 90 percent of covered earnings by 2050, make the benefit formula more progressive so that high-income recipients receive relatively less, index the retirement age to longevity gains, and dampen cost-of-living adjustments, among other measures.
In the main, retirement experts applaud the commission's big plan, though some are doubtful and some are reminding us of the need for immediate action, whatever it might be.
"I can applaud the commission's emphasis on strengthening the Social Security system and addressing worries about its long-term solvency," said John Laitner, director of the University of Michigan Retirement Research Center. "Solutions to solvency concerns will surely involve costs, but not doing anything now will make the costs larger when they are borne."
Others agreed. Anna Rappaport, president of a consulting practice bearing her name, said, "There are a number of very interesting ideas in the proposal and it seems thoughtful to me." And Michael Hurd, a senior economist and director of the Rand Corp. Center for the Study of Aging, said, "Almost all points about Social Security are reasonable."
Others, however, including Larry Kotlikoff, a Boston University economics professor and author of "Jimmy Stewart Is Dead," were less praiseworthy. "It does far too little, far too late," he said.
Here's an overview of the deficit commission's Social Security proposals.
REDUCE ELDERLY POVERTY: The commission wants to add new protections for the most vulnerable. In particular, it wants to 1) add a new special minimum benefit to keep full-career minimum wage workers above the poverty threshold; 2) wage-index the minimum benefit to make sure it is effective both now and in the future; and 3) provide a benefit boost to older retirees most at risk of outliving other retirement resources.
"I support the idea of a special minimum with indexing and think it is a very good idea," said Rappaport, who also noted that she agreed with the benefit boost for the oldest retirees.
According to Laitner, the proposal shows "sensitivity to the need to protect the most disadvantaged, and to avoid trying to use Social Security funds to address general-budget deficits."
The issue of elderly poverty for women, however, might need further attention. "We need to remember that for four out of 10 older women alone, and for a very large number of the bottom third of the population economically, Social Security is virtually all they have in retirement," Rappaport said. "And that is not likely to change although one might be able to reduce that number."
STRENGTHEN SOCIAL SECURITY FOR THE LONG HAUL: The commission plan calls for:
1) Increasing the progressivity of the benefit formula. The commission wants to move gradually to a more progressive benefit formula, including reducing the income replacement rate for wealthier workers' benefits, slowly over time. This plan would be phased in by 2050.
2) Increasing the retirement age. Under this proposal, the full retirement age would increase by one month every two years after it reaches 67 under current law. Right now, the full retirement age of those born in 1960 is 67. So, under this option, the normal retirement age would reach 68 in about 2050 and 69 in about 2075. The proposal would have a "hardship exemption" for those unable to work beyond 62.
"Indexing the retirement age seems to me to be a good idea," Rappaport said. "I question the speed they are proposing. I think they might have gone a little faster."
Others also questioned this aspect of the proposal. "It skips over quickly a very important aspect of increasing the retirement age: How to provide for those unable to work?" Hurd said. "It charges the Social Security Administration with finding a way to do this. Presumably it would be an enhanced version of the current disability program."
Also, it will be difficult and expensive to prevent those who can work but don't want to from claiming disability benefits, Hurd said.
3) Switching to a more accurate measure of inflation (chained consumer price index) for calculating cost-of-living adjustments. Right now, the adjustments are based on the CPI-Urban.
4) Including newly hired state and local workers in Social Security after 2020. Rappaport agreed that this would be a wise action.
BROADEN THE PAYROLL TAX BASE: The commission also wants to gradually increase the "taxable maximum" - or the maximum amount of earnings subject to Social Security payroll taxes - to capture 90 percent of wages by 2050.
Under current law, the commission said that the taxable maximum is pegged to growth in average wages. In 2009, the taxable maximum captured almost 86 percent of earnings, but it will fall to 82.5 percent by the end of the decade.
Retirement experts are not convinced this is a sound proposal, however. "With regard to increasing the tax base, there should be some consideration of the link between the tax-base increase and change in the benefit formula," Rappaport said. "If there is too much tax to higher income with not enough benefit, the system loses support from too many influential people."
But some favor this tactic. "Lifting the (contributions) cap to again cover 90 percent of earnings as Congress intended and scheduling ... rate increases for points in the distant future when additional funds would strengthen the (Social Security) program," according to a report by the National Academy of Social Insurance this month.
PROMOTE SMART RETIREMENT DECISIONS: The commission wants give Americans more choices when they claim their Social Security benefits. Right now, it's an all-or-nothing option. You can take the benefit early, at full retirement age, or delay up until age 70.
In any of those cases, however, you don't get the option to take some but not all of your benefit. Under the proposal, retirees would have the choice of collecting half their benefits early and the other half at a later age. This, according to the plan, would reduce the negative and mostly irreversible consequences of taking a reduced benefit before full retirement age, while supporting what has become known as phased retirement.
The proposal also would let the Social Security Administration design a way to provide for the early retirement needs of workers in physical labor jobs.
Rappaport praised the concept as outlined on paper, but questioned how it would be executed. "I like the idea of flexibility in how benefits are claimed, but think it might be extremely difficult to administer," she said.
Of note, the Boston College Center for Retirement Research in the past identified several ways to cut benefits. We could:
- Cut benefits across the board today;
- Raise the full retirement age;
- Freeze the purchasing power of benefits;
- Freeze benefits on a sliding scale;
- Change the cost-of-living adjustment; or
- Do nothing and then cut benefits in 2037.
The Center also identified several ways to raise revenue. We could:
- Increase the payroll tax today;
- Raise the earnings cap;
- Use the estate tax;
- Transfer start-up costs to general revenues;
- Raise the return on assets; or
- Do nothing and then raise taxes in 2037.
Meanwhile, with the commission's report as a backdrop, a slew of institutions issued their own reports, with some reminding us of the need for immediate action, whatever it might be.
"The 'no-action' scenario represents the most precipitous of possible outcomes for Social Security participants," according to a new paper commissioned by The Pew Charitable Trusts and written by Robert Greenstein, executive director of the Center on Budget and Policy Priorities, and Charles Blahous, public trustee for Social Security.
"Taking action soon, in contrast, would allow tax increases or reductions in scheduled benefits to be phased-in gradually, providing beneficiaries and taxpayers with advance notice and more opportunity to adjust their plans for work, saving and retirement.
So what's likely to happen now that the commission has drafted its proposals? First, 14 of the commission's 18 must approve of the proposals, to force Congress to debate the issues. The commission's final report is due Dec. 1. And then, it's up to Congress.
Robert Powell is editor of Retirement Weekly, published by MarketWatch.
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